1. Depository institutions have followed and originate-to-lend model of loan origination only since the Financial
Services Modernization Act of 1999.
2. The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to
follow an originate-to-lend strategy of loan origination.
3. Securitization increases the FI’s capital requirements.
4. When a Special Purpose Vehicle (SPV) creates asset-backed securities, the SPV retains ownership of the
original assets.
5. The life of a Structured Investment Vehicle (SIV) is not tied to any particular asset class that it is responsible
for securitizing.
6. Investors in a Structured Investment Vehicle (SIV) have no direct right to the cash flows on the underlying
portfolio of the SIV.
7. Despite the complexity of measuring the risk of asset-backed securities, credit rating agencies continued to
use their own measures to quantify risks involved.
8. GNMA helps create pass-throughs by providing timing insurance.
9. GNMA is a privately-owned entity.
10. GNMA will sponsor any pool of loans regardless of the size of each individual loan in the pool.
11. FNMA supports only those pools of mortgages that comprise mortgage loans whose default or credit risk is
insured by one of three government agencies.
12. Historically, FNMA has had a secured line of credit with the U.S. Treasury.
13. FNMA does not hold the mortgages it purchases on its balance sheet, thereby transferring credit and default
risk to investors purchasing its securities.
14. The three government agencies that sponsor the creation of mortgage-backed, pass through securities are:
GNMA, FNMA, and FDIC.
15. On September 7, 2008, FNMA and FHLMC were placed under conservatorship and both are controlled by a
federal government agency.
16. FNMA securitizes conventional mortgage loans as well as FHA/VA insured loans.
17. Individual mortgage loans in a pool sponsored by FNMA or FHLMC must be non-assumable of the
property is sold.
18. GNMA is more active in the market for mortgage pass-through securities than either FNMA or FHLMC.
19. Unlike GNMA, FNMA will securitize conventional mortgages issued by depository institutions.
20. The securities that form a GNMA pass-through are U.S. Treasury bonds, bills, and notes.
21. All tranches in a collateralized mortgage obligation (CMO) have the same prepayment risk exposure.
22. GNMA pass-throughs can assist an FI in resolving duration mismatch and illiquidity risk problems.
23. GNMA pass-through bondholders can be protected against default risk by FHA/VA housing insurance.
24. Investors in GNMA pass-through securities are exposed to the risk that the originating bank may fail, and
the risk that the trustee may mismanage monthly interest and principal payments collected.
25. Current statistics show, that the servicing fee depository institutions can earn by securitizing through
GNMA approximates 44 basis points.
26. Full amortization of a thirty-year mortgage means that monthly payments are equal and include both
principal and interest.
27. Prepayment risk means that realized cash flows on pass-through securities may be more than expected cash
flows.
28. The ability to refinance a mortgage with no prepayment penalty gives the borrower a long-term put option
on interest rates.
29. One advantage of asset securitization to a bank is the ability to originate new assets before the original
assets have matured.
30. All else equal, once a mortgage pool has aged, prior prepayments of mortgages in the pool have no bearing
on the current value of the pool or the future prepayment rates of mortgages left in the pool.
31. One cause of residential mortgage prepayment risk is the sale of the mortgaged property.
32. It is advantageous for the residential mortgage holder to refinance because market interest rates on new
mortgages are less than interest rates on existing mortgages.
33. The call option held by the residential mortgage holder is in the money when market interest rates are less
than the interest rate on an existing mortgage.
34. A bad news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market
interest rates includes a reduction in the discount rate on the mortgage cash flow.
35. A good news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market
interest rates includes the receipt of fewer scheduled interest payments.
36. Prepayment models are attempts by professional mortgage portfolio managers to estimate the rate of
prepayment on given mortgage pools.
37. The weighted-average life of a loan is greater than the duration of the loan.
38. Mortgage pools that are assumed to prepay at a rate of speed that is more rapid than the PSA model would
indicate, are said to prepay at less than 100 percent PSA behavior because the mortgage life and balance will
exist for a longer time.
39. Early prepayments on mortgages backing a CMO are normally allocated to the earliest existing tranche
maturity.
40. CMOs are typically created from existing GNMA pass-through securities that are held in trust.
41. The creation and sale of CMOs is based, at least in part, on the ability to segment the market for
pass-through security products.
42. Mortgage-backed bonds are a form of on-balance-sheet securitization.
43. Most mortgage-backed bond issues conducted by depository institutions are under-collateralized.
44. Mortgage-backed bonds differ from CMOs and pass-through securities in that there is no direct link
between the cash flows on the mortgages and the interest and principal payments on the bonds.
45. A mortgage pass-through strip security is a special type of collateralized mortgage obligation (CMO).
46. An interest-only (IO) mortgage pass-through strip has a claim on the present value of interest payments on
the mortgages in a GNMA pool.
47. The value of an interest-only (IO) mortgage-backed strip is not sensitive to changes in current market
interest rates.
48. At market rates substantially below the mortgage coupon rate of an interest-only (IO) mortgage-backed
strip, the prepayment effect will dominate the discount effect resulting in a decrease in the price of the IO strip.
49. An interest-only (IO) mortgage-backed strip is a rare example of a negative duration asset.
50. A principal only (PO) mortgage-backed strip is attractive to investors who wish to speculate about
decreasing interest rates.
51. A principal-only (PO) mortgage pass-through strip security is attractive to investors that wish to increase the
interest rate sensitivity of their portfolio.
52. The discount effect and the prepayment effect are negatively correlated in their impact on the value of a
principal-only (PO) mortgage-backed strip security.
53. Certificates of Amortizing Revolving Debts are asset-backed securities that have a claim on automobile
installment loans.
54. The packaging of loans into asset pools and then selling portions of the pool to investors is known as
55. Which of the following is a primitive form of asset securitization?
56. Which of the following is not accomplished by securitization of assets?
57. A commercial bank operating under an originate-to-sell model is acting most like
58. Which type of loans are securitized most often?
59. Which of the following assets have not been securitized by FIs?
60. As of 2009, the amount of mortgage-backed securities outstanding was approximately
61. All else equal, advantages of a DI operating as an asset broker in regard to mortgages includes all of the
following EXCEPT
62. Which of the following government agencies or government-sponsored enterprises are NOT directly
involved in the creation of mortgage-backed pass-through securities?
63. The Government National Mortgage Association
64. On September 7, 2008, both FHMA and FHLMC were placed under conservatorship by the
65. Which of the following is an incentive to securitize mortgage assets?
66. Which of the following factors occurred in the early 2000s and created concerns about the ability of Fannie
Mae and Freddie Mac to manage their portfolios of assets?
67. Which of the following are functions of GNMA?
68. Which is the oldest mortgage-backed security sponsoring agency?
69. Which of the following is the principle source of prepayment risk on a typical FNMA mortgage-backed
pass-through security?
70. Servicing a pass-through security refers to
71. The characteristics of a CMO securities issue include the following EXCEPT
72. Investors in mortgage-backed pass-through securities are exposed to a variety of risks. Compared to other
fixed-income securities, the most unique of these risks is